The Fed Blog

Wednesday, February 27, 2013

I was certainly pleased by the underlying strength of January’s durable goods orders excluding the volatile transportation index. It suggests that companies did curtail their capital spending plans late last year as a result of fiscal cliff fears. I argued that too many investors were focusing on the downside of going over the cliff and ignoring the upside if the cliff was averted, as we expected.

I am especially impressed to see that nondefense capital goods orders excluding civilian aircraft jumped to a new cyclical high during January. The recent surge was led by new orders for machinery.

Today's Morning Briefing: Dancing with Bulls. (1) Singing in the rain. (2) The view from Boston on retail investors. (3) Draghi may actually have to do whatever it takes. (4) Bernanke’s nightmare scenario. (5) A fourth anniversary for the bull? (6) Bernanke remains dovish. (7) Economy remains bullish. (8) Capital spending rebounds after fiscal cliff averted. (9) Good for Industrials that make machinery. (More for subscribers.)

Tuesday, February 26, 2013

The tightening balance between supply and demand is certainly reflected in rising home prices. The median price of existing single-family homes is up 12.6% y/y through January, the most since the fall of 2005. Nevertheless, the 12-month average of this price was still 21% below its record high during July 2006.

Today's Morning Briefing: Home on the Range. (1) Frustrated in Rhode Island. (2) Italians elect to be dysfunctional. (3) Draghi’s pledge was conditional. (4) Bond Vigilantes will now do whatever it takes. (5) Back home, housing is looking better and better. (6) A housing shortage? (7) Rising home prices reduce negative equity. (8) Homeowners’ equity rising faster than prices. (9) Building opportunities for construction workers. (10) Good for confidence. (11) More upside for housing-related stocks. (More for subscribers.)

We shouldn’t underestimate the ability of the sequester to slow the economy and weigh down GDP. The $85 billion cut in discretionary spending this year is only 2.4% of total federal outlays over the past 12 months of $3.58 trillion. However, those outlays include $2.19 trillion in spending on entitlements, which are a redistribution of income that doesn’t have a direct impact on GDP through its federal government component. Federal government spending in GDP, in current dollars, was $1.20 trillion (saar) during Q4-2012. That’s where the sequestration cuts will hit, as they account for 7.1% of this total.

Today's Morning Briefing: Echo Panic. (1) A fourth year of same-old-same-old worries? (2) Euro Mess, Sequester Drag, and China Syndrome--again. (3) The Italian job. (4) Monti is no longer so super. (5) Spending cuts will weigh on US GDP. (6) China will grow. (7) Bernanke will be dovish this week. (8) Revenues had a good Q4. (9) Forward earnings at new record highs again. (More for subscribers.)

Sunday, February 24, 2013

Japanese Prime Minister Shinzo Abe is expected to nominate Asian Development Bank President Haruhiko Kuroda as head of the Bank of Japan (BoJ). Since coming back into office on December 26, 2012, Abe has been pushing for the BoJ to do whatever it takes to boost inflation to 2%. The BoJ responded by agreeing to do so next year. Kuroda was the nation’s currency chief from 1999 to 2003, and is likely to push the BoJ to move faster.

The immediate consequence of his browbeating the central bank was a 16.9% plunge in the yen since September 27. The catch is that 18% of Japan’s exports go to China, where components made in Japan are assembled into final products. That could lower the input costs to Chinese manufacturers and increase their competitiveness. Higher import prices in Japan could depress consumers' spending by lowering their purchasing power. By far the biggest catch is that Japan’s numerous governments have tried massively stimulative fiscal and monetary policies for over two decades that all obviously failed to work.

Wednesday, February 20, 2013

Over the past few years, I’ve been asked on several occasions about my opinion on gold. I responded that my problem with gold is that I only know how to value assets with coupons, dividends, or earnings. I also observed that the price of gold had already increased sevenfold since January 20, 2001. That was when George W. Bush gave his first inaugural address. It was $265 per ounce back then, and soared to a record high of $1,895 on September 5, 2011. It was even a better buy in 1964, when "Goldfinger" was released and gold's price was pegged at $35 an ounce, as it had been since 1934 and remained until Nixon took the US off the gold standard in 1971. Yesterday, the price tumbled $41 to $1,563, down $229 from last year’s high and $332 from the record high.

The recent plunge in the price of gold happened despite a bullish Valentine’s Day press release just last week from the World Gold Council, the London-based industry group. It reported that central banks boosted gold purchases by 29% to 145 metric tons in Q4-2012, an eighth successive quarter of net buying. In the full year, the central bank bought 534.6 tons of the precious metal--the most since 1964, when Goldfinger plotted to nuke Fort Knox! On the other hand, demand for gold in India was down 12% last year and flat in China. ETF demand rose 51% last year, but was down 16% q/q during Q4-2012, as many hedge funds bailed out.

Other than profit-taking, what might be the fundamental reasons behind gold’s weakness? Perhaps the most important reason for the weakness in gold is that after three years of “living dangerously”--with lots of panics about apocalyptic endgame scenarios--the global economic and financial outlook is improving. That means that central banks may start to ease off on easing.

Today's Morning Briefing: Goldfinger. (1) Attacking Fort Knox. (2) Gold was a great buy. (3) Central banks hoarding gold. (4) Bulls on the run. (5) Not enough fear for gold. (6) Easing off easing. (7) Draghi’s immaculate intervention has been a drag for gold. (8) Abe talks down the yen. (9) QE has lost its punch. (10) The debate has started at the Fed. (11) Gold and TIPS. (More for subscribers.)

Tuesday, February 19, 2013

The VIX of both the S&P 500 and NASDAQ 100 are the lowest they have been since the start of the current bull market. The former is the lowest since the spring of 2007, while the latter is the lowest since the summer of 2005. Those were both good times to buy stocks as long as you sold them right at the market top during October 2007.

On the other hand, NYSE volume was much greater back then than it is now. The bears are warning that this combination of low volatility and volume is bearish. There is too much complacency and not enough trading to confirm the bullish trend of the market.

Maybe so. However, low volatility, low volume, and relatively low valuations all support my view that the bull market has been mostly driven by cash-rich corporations through buybacks, dividends, and now M&A.

Today's Morning Briefing: A Walk in the Park. (1) FDR’s investment strategy. (2) A depressing headline with an upbeat twist. (3) Volatility:1930s or 1990s? (4) Low VIX, volume, and valuation. (5) 2003-2007 again? (6) Earnings boost buybacks, which boost EPS. (7) Virtuous and vicious spirals. (8) The bright side of revenues & earnings. (9) G20 group hug in Moscow. (10) Easy money is still the only solution to all the problems. (More for subscribers.)

Monday, February 18, 2013

The Fed has contributed greatly to the bull market with its NZIRP and QE ultra-easy monetary policies, as evidenced by the close correlation of the S&P 500 and the securities holdings of the Fed. Bond yields fell to historic lows as the Fed purchased more fixed-income securities, increasing the attractiveness of stocks.

However, the recent torrent of speeches by members of the "Federal Open Mouth Committee" may be confusing investors. The talking Fed heads all have put their own personal spins on what the central bank is doing and where it is going. Fed officials have said that their goal is to communicate better with the markets. However, their noise-to-signal ratio seems to be getting worse.

On Valentine’s Day (2/14), FRB St. Louis President James Bullard spoke about phasing out QE: “This suggests that as labor markets improve somewhat, the pace of asset purchases could be reduced somewhat, but not ended altogether,” he explained. “This type of policy would send important signals to the private sector concerning the Committee’s judgment on the amount of progress made to that point.”

The next day, in a 2/15 speech, FRB Cleveland President Sandra Pianalto listed four risks to the Fed’s current course and then more or less agreed with Bullard: “[W]e could aim for a smaller sized balance sheet than would otherwise occur if we were to maintain the current pace of asset purchases through the end of this year, as some financial market participants are expecting. This course of action would be all the more attractive if the economic outlook continues to improve, as I expect it will.”

Both these speeches followed a 2/11 speech by Fed Vice Chair Janet Yellen, in which she said that ultra-easy monetary policy might remain in place even if the Fed’s unemployment “threshold” of 6.5% is achieved as long as inflation remains around 2%.

Wednesday, February 13, 2013

Business sales of goods rose to a new record high of $15.3 trillion (saar) in the US during December. They are up 3.6% y/y. That’s all good news and supports our view that the y/y growth rates in both S&P 500 revenues and earnings should rebound from 1.1% and 1.4%, respectively, during Q3-2012 to 5%-7% this year. (So far, the Q4-2012 company reports suggest that revenues are up around 3.7% and earnings are up 6.3% compared to a year ago.) The resilience of the US economy late last year, as the dreaded fiscal cliff seemed imminent, was impressive.

Tuesday, February 12, 2013

The Chinese have the will and the way to stimulate growth. Commercial bank loans in China soared $173 billion during January, the biggest m/m increase since January 2010. M1 and M2 growth rate spiked up to 15.3% and 15.9% y/y, respectively, during January. In other words, the Chinese are doing it again: pumping up liquidity to boost their economic growth, much as they did in late 2008 and early 2009.

At about the same time as Chinese authorities encouraged their banks to lend more to boost domestic growth, Japan’s new government promised to deliver yet another round of stimulative monetary and fiscal policies. No wonder that the stock markets of China and Japan are up 31.4% and 31.3%, respectively, from their late-2012 lows. Stock markets are also soaring in neighboring countries such as Australia, Indonesia, Thailand, and The Philippines.

Monday, February 11, 2013

The fracking revolution is boosting oil production not only in the US, but also in Canada. Data compiled by Oil Market Intelligence show Canadian crude oil output jumped 0.5mbd over the past seven months through January (and 1.0mbd over the past 20 months) to a record 3.5mbd. In other words, the US and Canada combined pumped out a record 10.4mbd during the first month of the year.

Together, their actual output exceeds the maximum sustainable production of Saudi Arabia, widely estimate to be 10mbd. So why have oil prices been rising since the start of the year rather than plummeting? To prop up the price, the Saudis have been forced to lower their output by 1.0mbd over the past seven months to 8.8mbd during January to make room for all the crude pouring out of North America.

Sunday, February 10, 2013

Fed Chairman Ben Bernanke on numerous occasions explicitly stated that his ultra-easy monetary policies were aimed at boosting stock prices, resulting in a positive wealth effect on consumer spending. Stock and real estate prices are rising amid some concerns that the Fed is doing it again, i.e., pumping air into asset bubbles.

The market capitalization of the Wilshire 5000 is up $9.2 trillion since March 9, 2009, to $16.0 trillion on Friday. The Fed’s flow of funds data show that the value of all stocks in the US has increased by $12 trillion to $26 trillion from Q1-2009 through Q3-2012. The value of stocks directly held by individuals is up $4.7 trillion to $9.8 trillion over this period. The values of equity mutual funds and equity ETFs are up $2.3 trillion and $634.7 billion, respectively, over this period.

Owners’ equity in household real estate jumped 19.6% by $1.3 trillion to $7.7 trillion during the three quarters through Q3-2012! There’s more to come given that the median existing home price rose 10.9% y/y during December, the best pace since January 2006.

Thursday, February 7, 2013

The jump in Lipper’s weekly equity mutual funds inflows since the start of the year has sparked some chatter about a "great rotation" out of bonds and into stocks.

January is historically a strong month for inflows as investors make their annual contributions to IRAs and year-end bonuses are invested. This year there was a bulge in such funds as more bonuses and dividends were paid out before the "fiscal cliff" tax hikes expected at the start of 2013. Let's have a closer look at the data:

(1) Wages and salaries in personal income popped by 0.6% during December. Odds are this number will be revised upwards given that individual income tax receipts collected by the US Treasury jumped 19.8% y/y (the most since October 2011), with the 12-month average up 1.9% m/m.

(2) Dividends in personal income spiked from $782 billion (saar) during November to $1.1 trillion during December. Data available through December show that reinvested dividends in equity mutual funds rose to a record $77.0 billion last year, with a record $46.6 billion during December alone.

Today's Morning Briefing: The Future Is Back.
(1) Paradise lost and found. (2) The future is making a comeback. (3) Corporate flows feeding the bulls. (4) The Great Rotation? (5) The fiscal cliff turned out to be bullish. (6) Yearend bulge in bonuses and dividends. (7) The January Barometer. (8) Three major positive trends for the future. (More for subscribers.)

Tuesday, February 5, 2013

The National Bureau of Statistics of China conducts the official surveys of purchasing managers. The agency’s manufacturing index for January was based on a pool of 3,000 respondents, more than triple the previous number. It also plans to expand the sample size for its services survey to about 8,000 companies from 1,200. China’s official M-PMI edged down from 50.6 in December to 50.4 last month. The official NM-PMIedged up from 56.1 to 56.2.

China’s manufacturing sector is showing signs of slowing as the country’s rising labor costs reduce the competitiveness of its export sector, which has been a major employer. Indeed, there is a good correlation between the M-PMI’s Export Orders Index and the Employment Index. Both have been mostly under 50 since mid-2011.

Today's Morning Briefing: Purchasing Managers: Our BFFs. (1) Insightful friends. (2) Been around for a while. (3) Are they seeing an upturn in the US and global economies? (4) PMIs are useful leading indicators for S&P 500 revenues and earnings. (5) US may be leading global upturn. (6) Services strong in Germany and China. (7) Export orders and employment weak in China's manufacturing sector. (More for subscribers.)

Monday, February 4, 2013

Yesterday’s selloff in the US stock market started early in the day as investors were spooked by a 24bps jump in the 10-year Spanish government bond yield. Reuters reported: “Spain's opposition party on Sunday called for Prime Minister Mariano Rajoy to resign over a corruption scandal, an allegation Rajoy denies, pushing Spanish 10-year bond yields to six-week highs. In Italy, 10-year Italian government bond yields hit their highest since late December, as chances of former prime minister Silvio Berlusconi regaining power raised worries about Rome's ability to fix its fiscal problems.” The good news is that the bad news might halt the recent rally in the euro, which can’t be good for the euro zone’s exporters.

Sunday, February 3, 2013

A melt-up could propel the S&P 500 to my yearend target of 1665 before the middle of the year. That might be too much of a good thing. Such exuberance for stocks would probably reflect and contribute to stronger-than-expected economic growth. The market could then have a nasty correction during the second half of the year if we learn that Fed officials are increasingly alarmed that they are doing it again, i.e., pumping air into another stock market bubble.

Stock investors were undoubtedly happy to see on Thursday of last week that the core personal consumption expenditures deflator rose only 1.3% y/y during December, the lowest since May 2011. It’s also well below the Fed’s 2.5% red line. In Friday’s employment report, wages of all workers rose 2.1% y/y during January. That’s still very subdued, though up from last year’s low of 1.5% during October.

On the other hand, the expected inflation rate embedded in the spread between 10-year Treasuries and TIPS was at 2.6% on Friday, and seems set to move higher. If it does so, that could put the Fed in a real box. If expected inflation spikes up later this year, there could be more than one or two dissenters in the FOMC. Esther L. George, the President of the Kansas City FRB, was the lone dissenter with a vote at the January 29-30 meeting of the FOMC because she “was concerned that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations.”

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ABOUT: Dr. Ed Yardeni is the President and Chief Investment Strategist of Yardeni Research, Inc., a provider of independent investment strategy and economics research. This blog highlights excerpts from our research service, which is designed for investment and business professionals.

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